A market “tsunami” hits Indonesia—could Malaysia become a safe haven for capital?

(Kuala Lumpur, 29th)
Following a strong warning from MSCI over Indonesia’s market investability, Indonesian equities plunged for a second straight session, bringing the two-day decline to 12.65%. Against this backdrop, Malaysia is increasingly seen by some investors as a potential relative “safe haven” within the region.

Goldman Sachs Research said that, given the possibility of MSCI downgrading Indonesia from emerging market to frontier market, it has cut Indonesia to “Underweight” while upgrading Malaysia to “Market Weight,” adding Malaysia to its Asia-Pacific coverage list.

MSCI released its index review outcomes on January 27, warning that if Indonesia does not improve market transparency, its weight in emerging-market indices could be reduced—and in a more severe scenario, the market could face a downgrade. Goldman expects this could trigger sizeable passive outflows. While Indonesia already fell sharply on January 28, the bank believes selling pressure may not be fully absorbed quickly.

Malaysia supported by multiple tailwinds
Compared with Indonesia’s challenges, Goldman views Malaysia’s macro backdrop and allocation environment as more resilient. It highlighted several supportive factors: GDP growth is projected at 4.9% in 2025, above the government’s 4.0%–4.8% range, with around 4.5% expected in 2026. Cash handouts to households and civil-service pay increases are seen as supporting domestic demand. Externally, improving electronics demand is expected to lift exports, while the ringgit has outperformed many regional currencies—rising about 4% against the U.S. dollar year-to-date in 2025.

Goldman also pointed to thematic opportunities in AI and data centers. It said Malaysia’s data-center investment doubled to RM14.1 billion in 2025, potentially adding 0.5% to GDP growth. It also noted that data centers accounted for 51% of foreign net inflows, versus about 4% two years earlier.

In addition, incentives under government digital-ecosystem acceleration programs—alongside relatively competitive land and energy costs—are viewed as attracting capital from Singapore, China, and the U.S.

Earnings and valuation outlook
On flows and liquidity, Goldman noted that large domestic retirement funds such as the EPF and KWAP are required by mandate to allocate to domestic assets, helping underpin the equity market.

Goldman forecasts high single-digit earnings growth for Malaysia in 2026–2027, with the market trading around 14.7x P/E, near the historical median, and with reasonable ROE levels. Using a target 14.6x P/E and 8%–10% earnings growth, it raised its KLCI target from 1,750 to 1,880.